Yet another ratings downgrade for N.J. debt

Analysts at Moody's Investors Service have again downgraded New Jersey's general obligation bonds, marking the third time the ratings agency has taken such action since Gov. Christie took office in 2010.

Moody's late Thursday downgraded the state's debt to A2 from A1, and has threatened to cut the rating yet again.

The state already was rated second-worst in the nation, with only Illinois lower.

Both states face large pension obligations they have failed to adequately fund. Unless New Jersey cuts pension spending or boosts pension funding, Moody's says, it expects the state pension system to run out of money in the next nine to 12 years.

New Jersey debt has been downgraded nine times by the three major ratings agencies during Christie's tenure.

Lower ratings are supposed to reflect a higher likelihood that a borrower won't pay what it owes. Debt issuers with lower ratings are often forced to pay higher interest to get investors to buy their bonds.

The downgrade comes as Christie, a Republican considering running for president in 2016, holds town hall-style events across the state to press his case for overhauling the pension and health-benefits systems for public workers.

He appeared in Bergen County on Thursday to continue that push before traveling to New Hampshire, the state that holds the nation's first presidential primary.

Christie wants public workers to contribute more toward their health plans to more closely align New Jersey's benefits with those in the private sector. He says he would use the resulting savings to pay down the pension system's $83 billion unfunded liability.

Christie's proposed $33.8 billion budget for the fiscal year that begins July 1 includes a $1.3 billion payment to the pension system, about $1.8 billion short of what is required by a 2011 law that he signed.

A judge ruled in February that Christie had underfunded the pension system for the current fiscal year by about $1.6 billion. The governor said the state could not afford the full payment because of a revenue shortfall.

The state Supreme Court is set to hear arguments in a suit brought by unions to compel full payment. Unions also are suing to compel full payment for the next fiscal year.

The Moody's report underscored the pension system's funding woes.

"The downgrade to A2 was driven by the lack of improvement in the state's weak financial position and large structural imbalance, primarily related to continued pension contribution shortfalls," Moody's analysts told clients in a report.

"We expect liquidity and structural balance to remain very weak through fiscal 2016," with no improvement without "economic growth and further pension reforms," which Moody's considers "uncertain."

The "negative outlook" warning "reflects our expectation that the state's financial and pension position will weaken further before pension reform, if successful, is implemented," Moody's added. "Without meaningful structural changes to the state's budget," Moody's concluded, "the state's rating will continue to fall."

Lower ratings are expected to affect not just New Jersey state bonds, but also corporate incentive, construction subsidies, highway, port, environmental, sports and convention center, college, municipal, public school, and other state-backed bond programs.

Moody's on Friday also downgraded a bond program for New Jersey county colleges from A2 to A3. The affected counties are Cumberland, Essex, Passaic, Sussex, and Warren.

"Moody's action today once again underscores the urgent need for structural reforms of our public employee pension and health benefits system," state Treasury Department spokesman Christopher Santarelli said.

Despite reduced reliance on one-time funding arrangements and other "improvement in objective measures of fiscal stability, New Jersey's long-term pension and health benefits liabilities remain serious long-term financial challenges," he added.

Tom Kozlik, a municipal bond analyst at Janney Montgomery Scott in Philadelphia, said New Jersey's credit quality (like Illinois') is "highly questionable at this point. There is nothing that leads me to believe that this will be the last downgrade for the Garden State."

The Legislature's Democratic leadership has resisted Christie's call for further changes to the pension system, arguing he first needs to fund it.

"This is what happens when the administration fails to make the legally required pension payments and does nothing to generate economic growth," Senate President Stephen Sweeney (D., Gloucester) said in a statement Friday.